Financial Industry Insights from Advisors Asset Management


International Equities Still Holding Their Own

Investors seem more accepting when we suggest it may be time to consider adding allocations to international if they are underinvested. Performance is probably at the heart of this; trailing 12-month returns show the MSCI ACWI ex-US Index (international) holding its own against most U.S. indexes. Between the end of third quarter 2022 and this year, international equities essentially matched the S&P 500, and beat the S&P Equal-Weighted, Dow Jones Industrial Average, and the Russell 1000® Value indexes. Year to date (1/1/23-9/30/23), however, the S&P 500 is ahead of international as several mega-cap growth stocks have stolen the show. We believe higher rates and more competition could be their undoing, so believe international could be poised to compare favorably for some time.

Other trends of note we see:

  • Higher rates have supported value stocks, recession forecasts have been delayed and pushed out. Consumers and corporations seem to be in good shape. Rates have been rising.
  • In Europe, the continent had weaker economic trends in the manufacturing and service sectors (as measured by their Purchasing Managers Indexes), as destocking and export weakness occurred. European labor markets remained strong. Japan posted a 6% growth rate in the quarter, and the UK saw positive revisions to economic growth since the pandemic. China has been stimulating and recently reduced most mortgage rates by 50 basis points. Manufacturing looks due for a rebound.
  • Developed central banks are likely on pause, while emerging markets have been stimulating. Developed markets sovereign rates have risen as it appears bond vigilantes have woken up. We believe rates could stay higher for longer, though the recent move up seems extended.
  • A new capital investment cycle has been underway, driven by infrastructure, re-shoring, green energy initiatives, commodity/energy investment and defense spending. Recent events indicate the cold-war peace dividend period is likely over and new threats likely require industrial policy favoring defense and investment. This could bolster value-oriented strategies.

Will there be a recession? Someday, but probably not yet. We are wary of several things that could shock consumers into spending less, but they do not seem to have sufficient traction yet. The geopolitical situation is a worry. Consumer sentiment in developed markets is often a casualty of war, and energy prices also tend to rise. There is a manufacturing slowdown, though we think restocking probably prompts a pickup later this year. Higher oil prices could rekindle inflation, but that probably takes time. Higher labor wage settlements could play into that as well.

Still, against all of that, we see strong labor markets in Europe and Japan, good consumption, and earnings recovering.

Additionally, government spending is likely to pick up as developed markets need to promote the capital investment required to defend themselves and re-shore critical industries. This appears to be the new post-Covid normal. Without a recession, markets could stage a fourth quarter recovery from the poor third quarter showing.

In summary, Wall Street strategists seem to still be angry that they missed the no-recession call. We think several factors have aided the economy and delayed the traditional onset of a recession, maybe for years. The U.S. market fascination with the largest seven stocks is primarily a result of recession anticipation, as they are often viewed as “recession proof.” We believe the new capital cycle is likely to keep the economy afloat and bolsters the case for global investing. Furthermore, we anticipate that a delay in the onset of a recession could allow for a rotation to more value and globally oriented leadership from the recent U.S. tech winners.


CRN: 2023-1012-11174 R

Opinions in this piece are those of Todd Asset Management and are not necessarily that of AAM.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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